Never again.
That is a feeling felt strongest when the pain is fresh. Delay dulls the senses.
It has been three years since the credit crisis began to blossom, and nearly two years since the collapse of Lehman Brothers and the bailout of the American International Group. The lessons of the crisis seemed clear at the time. Financial institutions had taken on far too much leverage. They had too little capital, some of which turned out to be evanescent when it was actually needed. That must never happen again.
That spirit was still with international bank regulators when they met in Basel, Switzerland, last December. Out of that came tough proposed standards. The kinds of things that qualified as capital would be cut back. There would be new requirements that banks keep a lot of that capital liquid, so it would always be around when needed.
â??The crisis,â? wrote the Basel Committee on Banking Supervision, â??illustrated how quickly and severely liquidity risks can crystallize and certain sources of funding can evaporate, compounding concerns related to the valuation of certain assets and capital liquidity.â?
Another consensus was that something had to be done to make bank regulation â??countercyclical.â? The committee, made up of central bankers and regulators from 27 countries, promised that this month it would â??review a fully fleshed outâ? proposal to accomplish that through what it called a â??countercyclical capital buffer.â? Such a buffer would force banks to accumulate extra capital when times were good, so it could be used when the bad times arrived.
This week, that long awaited meeting was held.
It seems to many to be an anticlimax. There was no solid countercyclical proposal. There were backtracking and delay on major parts of the December proposals. The concessions appeared to be aimed at pacifying upset bankers.
In December, the Basel committee said that some kinds of dubious â??assetsâ? simply could not be counted as part of capital. High on that list was something called â??deferred tax assets.â? If you donâ??t understand what that means, it basically is the money a bank will save on taxes when it earns profits in the future.
It is hard to think of an asset that would be less useful in a crisis, but there are others that could be of little use, like nontraded stock in a related financial company. Mortgage servicing rights â?? the value of a bankâ??s rights to collect and pass on mortgage payments â?? also could be hard to monetize in a crisis.
In December, none of those assets were to be counted in capital. Now all can be, albeit to a limited extent. Apparently Japanese banks really needed to count the deferred tax assets, Europeans were eager to get credit for shares in related insurance companies, and American institutions wanted to count their mortgage servicing rights.
When it comes to liquidity rules, the revisions greatly soften the assumptions the previous rules made about how severe a crisis might be, and therefore make it easier for banks to appear to be perfectly liquid. The long-term liquidity rules, aimed at dealing with a prolonged downturn, may never see the light of day. They are to be studied and pondered and delayed. If details are ever agreed, they are to take effect in 2018. By then, if history is any guide, there will have been a new, and different, crisis to deal with.
Instead of offering a â??fully fleshed outâ? proposal on countercyclical capital buffers, the committee asked for comment on a paper that discovered the issue was difficult. â??Our analysis indicates,â? the paper concluded, â??that any fully rule-based mechanism may not be possible at this stage.â? In that case, regulators would have to show discretion, and the paper doubts that it would be politically possible for them to impose a buffer in good times.
All this makes it easy to conclude that the regulators are again giving in to banks, who had demanded much weaker standards and warned that they would be less able to lend if they had to set more money aside to comply with liquidity and capital rules.
But that conclusion may be wrong, or at least premature. The December proposal was a work in progress, the result of shuffling together proposals from a number of working groups. Some backing down was needed. And it is normal for regulators to propose more than they expect to get, allowing those regulated to feel their concerns were at least partly heeded.
Floyd Norris comments on finance and economics in his blog at nytimes.com/norris.
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